Is Now a Good Time to Buy European Stocks?
Now that the Euro is at lovely cheap levels against the pound, it’s like there’s a super hot sale going on in the stock market. I have therefore been thinking about investing in Euro denominated companies, even more so because the US $ is too strong against the £ for me to justify investing more money in American stocks. But should I invest in European stocks? I mean the shares would be pretty cheap from an exchange rate perspective, but:
- are there any fabulous companies out there that would be more worthwhile investing in than British or US stocks?;
- what about any withholding taxes I might not be able to get back?
Problems of Investing in European Stocks
No More Waffles has recently started maintaining a Euro Dividend All Stars spreadsheet, much along the lines of Dividend Life’s fantastic resource, the UK Dividend Champions spreadsheet. Yet one of the problems with the European version is the lack of lengthy dividend growers. Many companies maintain, rather than increase their dividend year-on-year, meaning that once you’ve taken inflation into account, you’re potentially left with less money. One of the few European stocks that is a strong contender for my investment money is Munich Re, who were coincidentally recently analysed by No More Waffles just yesterday in his most recent post. Another is BMW, but not really due to dividend growth, but rather because I just believe in the marque and think they’re the best 
How to Claim Back Withholding Tax on European Dividends?
My main qualm about investing in European stocks is the withholding tax (WHT). It is pretty annoying that dividends are taxed before they even reach your account. However, it then gets even more annoying that you might have to go through some horrendous tax reclaim forms and faff about to claim back some/all of the tax. I have found useful resources for claiming tax back in your NISA or SIPP accounts, such as this resource. But, since I hate both getting taxed, and filling in boring and annoying forms, I often wonder whether I should just buy into a European tracker instead. I could even get a currency hedged fund, thus keeping more of the potential gains. This is actually what I did in my SIPP recently – I just bought a European fund. My SIPP has no dealing charges for funds, but a hefty charge for dealing in shares of any stock, international or otherwise.
Should I Invest in European Stocks?
So, my questions go over to you dear reader – would you invest in European stocks? Would you use a fund or invest in shares of individual stocks? What would you do about WHT? Let me know, leave a comment below.
photo credit: bplanet/freedigitalphotos.net
Hey M
Whilst I’m still intent on increasing the global aspect of my funds portfolio, my share portfolio is where I intend to have complete home bias – I’ve not considered buying stocks outside of the UK, or rather those that are listed outside of the LSE. Of course, that’s not to say I won’t EVER buy, since more diversification doesn’t do any harm!
weenie recently posted…March 2015 Savings, Net Worth and other updates
understood. I am sort of heading that way too. All my new additions are UK based. My pension is another matter, with it being very diversified indeed.
Cheers
I know what you mean. There is so much in London which still attracts my funds that I can’t work out whether non-UK investments are worth the hassle at the moment. I am still researching US investments (as you know!).
Europe, in reality, is even more appealing in many regards. The UK market seems to positively correlate less with the European markets than it does the US market. This seems a good reason to consider it.
Obviously, it also seems quite noticeably undervalued unlike the US market. That being said, though, the UK market is hardly overvalued.
I must admit, though, I find Europe a lot more opaque due to its necessarily fragmented nature. If there is a way to smooth it out a little that is certainly good! What would your plan be to actually invest in there? Using Lynx as you have suggested previously?
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Hey,
thanks for your reply. I think you’re right – there are just so many stocks on the LSE that are great dividend growers – why bother with the hassle of individual stocks in Europe? I think I can probably capture more AND without tax by just sticking to the home market. I would like to fill my NISA first – I think I’ll probably just do that for the time being. If I really want to, I’ll buy a cheap fund or a tracker for Europe.
One thing that would be good, for those using a SIPP, is that you can receive the dividends from US stocks tax-free. I only have fund in my SIPP at present, but it might be worth thinking about this more in the future.
Cheers
Yes I was looking at SIPPs and their benefits for investing in non-UK stocks. Also, SIPPs can hold foreign currencies (as I understand it, although most providers don’t actually provide this service). If I can find a cheap SIPP provider which does accept non-sterling currencies I may use that as a foreign investment vehicle! I will keep you posted if I find one.
I do find both US and European stocks tempting. I hope to find an efficient and effective way of investing in them directly. But if not, funds and ITs it will have to be I suppose!
Right now, for me, the “home bias” will have to reign supreme! I will stick with filling my NISA as well for now. I will struggle to get anywhere near it next year, I suspect, so will focus my energies that way for now!
Dividend Drive recently posted…March 2015: Dividend Income and Trading Activity
Yes, it’s interesting that there are lots of advantages to SIPPs that people just do not realise. They are not really promoted though are they. And as you say, many of the SIPP providers don’t even offer half the available services/functions that they could do.
I think if the exchange rate went back in our favour to the US$, I’d probably buy some more US stocks, but I’d still want to keep the overwhelming majority in the UK because of the tax.
Oh and on ITs, I was just researching them on Tuesday. Thinking about maybe buying into some. I do have them in some of our portfolios but not in the NISA
Cheers
I think the issue has been compounded (if you can see it that way) by just how appealing NISAs have become. Being simpler to understand and with much larger available allocations it is little wonder we focus on NISAs over SIPPs. I am trying to find out more about them. I may open one eventually, but for now I can focus (like you) on filling up the NISA!
Yes, some of the ITs are quite attractive. I only have a handful of European ones I follow. My favourites are the The European Investment Trust (EUT) and Henderson European Focus Trust (HEFT) as they have higher yields than most and lower TERs. I think EUT is also running at a discount at the moment.
I have not researched them greatly though and would not invest in them until I had got the time to do so thoroughly. Do tell us if you come across anything of interest!
Dividend Drive recently posted…March 2015: Dividend Income and Trading Activity
I think that SIPPs are just not sexy enough! Who wants to think about retirement when you are 21 and straight out of university? Not me! Not that I am 21 or straight out of uni, but I think you get what I mean. The NISA vehicle is flexible enough to allow a wonderful array of investments, and it can be accessed long before the age of 57+ or whatever the minimum age will be by the time today’s fresh-faced youngsters are thinking about retiring.
I will probably do a post on ITs sometime soon. They’re quite a good way of evening out your income stream, as most pay quarterly, and some even pay monthly.
Cheers
I think you’re right. Maybe it is time for a rebrand like with ISA–>New ISA. “Sexy SIPP” could work. Petition the government straight away!
For me, there are two reasons. First, is that they are much more confusing than ISAs (though, I think it says more about the simplicity of ISAs). Second, they tend to cost more to open and manage. Third, they are far more restrictive.
As you say, when you’re in your 20s retirement even with the best case scenario is years away with–for most–mortgage, family, etc all in the pipeline. Having you assets locked away for all that time is not attractive at all. I’m lucky to be in my mid-20s and don’t plan to retire before 65 (but want to have the choice hence the saving and investing) so SIPPs are largely less attractive at the moment. I would like to start the ball rolling however if I can find a cheap provider!
ITs do really, really interest me. I agree, the dividend policies of many are attractive. But also, some are very well run and produce solid and “safe” returns. Very attractive indeed! Can’t wait to see your thoughts on them!
Dividend Drive recently posted…March 2015: Dividend Income and Trading Activity
haha petition the government when they’ve just been dismissed to go on the campaign trail? Yeah I can just see it – our latest soundbite ‘sexy sipps – even better than NISA ISAs!’
Why don’t you have a look at the BestInvest SIPP? That is who I went with, and I started just by contributing the minimum amount, and with the rest of my savings I was concentrating on filling my ISA, p2p, and minimal SEIS stuff. I thought it was worth just getting the SIPP because of the free tax money
FREE MONEY!
Haha, they listen when they are trying to get your vote!
Yes, I looked at BestInvest in the past. It does seem one of the better. My main issue is the fees they (not just BestInvest but all providers) charge. It seems to severely curtail your real return as opposed to a fee-free ISA.
The “free” money is an interesting one. I want to work out whether it is a good deal or not over ISAs. Obviously, with ISAs you’re invested money is taxed before you invest it but not taxed when you take it out. In contrast, with a SIPP you investment is–in essence–untaxed but then taxed when you draw it out after retirement.
Presuming capital gains are fairly significant, being taxed at the tail end of the process as with SIPPs sounds like it may make it–at best–about as good as ISAs and at worst weaker. ARGH! I just can’t work it out at the moment! I will have to do the maths at some point (or find someone who has already done it!).
Dividend Drive recently posted…March 2015: Dividend Income and Trading Activity
Yes, I get you. The maths is a shocker. But my vague plan on that note is to build up a smallish amount in the SIPP by only contributing the minimum per month, with the rest being diverted to my NISA. Then when I hit 57, or whatever the age changes to by then, I’ll take the tax-free lump sum and put that into my NISA for that year. With the rest, I’ll take an income up to the level of the personal allowance, and let the rest of my income come from the NISA. I think if I were older, I’d be putting a lot more into the SIPP, but at the moment, I think I can be FI in under 18 years at current progress and with modest small increases in contributions per year. I will be about 50 then, so long before the SIPP would kick in.
As always, thanks so much for your engaging comments!!!
Cheers
I know! I have tried to do the maths as best as I could. Think I have worked it out. You’re right, even with the 0.3% per annum fee for the BestInvest SIPP you still end up coming out of a SIPP (all other things equal) ahead of an ISA. It was a mammoth task to work out though. If I get the time I will try and write it up (and then no doubt be told my maths is wrong somewhere!).
I had forgotten about the personal allowance. Of course, you can withdraw up to a certain amount from your pension (even after the 25% lump sum) and not be taxed. That tilts it further in the SIPP favour.
What is clear is that if I ever get into the 40% tax band a SIPP makes a huge amount of sense!
I think your plan is very good indeed. Dropping a little in the SIPP as you go along. If I could find one which accepted non-sterling currency I would happily turn it into my little foreign investment vehicle. Can’t find one though!
FI in 18 years sounds pretty good to me! Exciting figure to keep an eye on!
The fact you can’t touch the SIPP before retirement age is my biggest issue with it at the moment. I like to know the cash is liquid even if I don’t intend to liquidate it! If I ever became a higher rate taxpayer though I would jump on a SIPP straight away!
Thanks for the replies and interesting ideas/thoughts. Plenty of food for thought!
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I do hope you write up your results! I think it would be great, even if you’ve gotten the maths a bit wrong, because I’m sure the comments would help you and other people to figure it out.
I think because it depends on so many factors, it may really be impossible to work out properly. Perhaps if you were in your 40s it might be a lot easier, as you would be closer to the allowable withdrawal age of 55/57 or whatever it might be by then. Since you are quite young still though, it seems to make more sense to build up the NISA as much as possible, as that could also go towards things you might need in the future like a house deposit, or an extension, or a wedding, etc. etc.
Have you checked out sippclub.com? Might be worth looking into to see about alternative investments for your SIPP.
Cheers!
I wish I could invest freely in EU market however as Roadmap2Retire mentioned, there are so many hassles for me to invest directly into EU market. It is a bitter truth as I can definitely see the opportunities there.
BSR
BeSmartRich recently posted…Recent Buy- Canadian Imperial Bank of Commerce, CIBC (CM) +$102 annual dividend
maybe you just have to bite the bullet and buy an ETF or a hedged ETF?
M,
That NoMoreWaffles guy you keep referring to must be one smart cookie, whoa!
Seriously though, I believe investing in the European stock market is an excellent idea for the British. Please don’t let the taxes hold you back from doing so. If you invest in Munich RE, for example, you still get to enjoy a decent yield and potentially excellent growth over the coming years. And if the Euro goes back up to previous levels, you’ll achieve nice capital gains too.
Your other option would of course be to buy ETFs or managed funds, like you said. But I don’t think that WHT should be the only reason for doing so.
Let us know what you decide on,
NMW
PS: the link to the Munich RE article seems to be broken.
No More Waffles recently posted…Munich RE (MUV2) Stock Analysis: An Assured Dividend Payment
Hey NMW,
I think you’re right about the capital gains perspective. There could be some serious money to be made. It’s just kind of weird though, because there are actually several stocks I still want to buy on the London market and there will be no tax implications. SO I just need to make an estimation of whether it is really, REALLY worth buying the Euro stocks. The exchange rate has gone down slightly from it’s amazing recent high of €1.42 to the £, but it’s still well over €1.30, which I think is a solid rate.
P.S. I checked all the links and they worked fine for me. Not sure what the problem could be?
M,
Even though I don’t pay attention to exchange rates all too much, I still believe you should be targeting the Euro market over the coming months. With QE having started only last month, there’s a lot of new and fresh capital on the markets waiting to be scooped up by companies willing to grow at low-interest rates.
Looking forward to your next moves!
I was referring to the link with the anchor “most recent post”!
Happy Easter,
NMW
No More Waffles recently posted…Savings Rate for March 2015
Hey man,
Yes I do believe there is a potential here in the European market, I have added a fair bit to my pension (SIPP), but I can purchase hedged fund with no dealing costs there, whereas for my dividend portfolio (M’s NISA), I am wanting dividend paying shares. I’m just not entirely sure that it’s wrth it after the 15% or more has been taken off in tax. I know that there are plenty of great opportunities on the London markets already, upon which I won’t be taxed… hence the dilemma.
But that is why it’s good to have these discussions in the comments, because it helps to weigh up the pros and cons
CHEERS
I would buy EU stocks now, but there are still some roadblocks that stop me.
For starters, most of my investment assets are in tax sheltered accounts – so, I cant directly trade on the EU markets…I am limited to the North American markets. Moreover, the only access I have to the EU markets is by the stocks registered as ADRs in the NYSE market – which means that I have to consider the currency fluctuations issue – first when I buy, I need to convert CAD to USD, then buying the stocks in USD means that the income is also a bit suppressed because of the EURUSD conversion rates. Of course, I could buy some ETF directly here in the Canadian markets, but to really take advantage of dividend growth, I would rather buy the stock directly. I wish there were more EU companies directly trading on the Canadian markets..but oh well.
Anyway, getting back to the point…Im not sure about your tax treaties between UK and EU, but if its favorable, its definitely a good time to invest in EU.
Best wishes
R2R
Roadmap2Retire recently posted…Chatter Around the World – 89
Dude. that is quite a lot of blockage. you might as well buy some kind of fund or ETF – it’ll keep things WAY simpler. One surprising thing is that you can’t just buy foreign stocks through your broker. Many basic accounts here do that, e.g. mine. I can’t trade some exchanges such as Japan and Australia, but I can do the larger European ones, the NYSE, and the TSX.
Cheers